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Please see important disclosure information on pages 6 - 8 of this report.

EventVAR reported slightly lower-than-expected FQ1 revenue, offset bymaterial EPS outperformance driven by significant GM expansion.Solid oncology order growth in N.A., Europe and China was offset bya steep drop in Japan orders. Management reiterated F11 revenueguidance and raised their full-year EPS outlook.

Key Points GM expansion story comes earlier than expected. Although we

have expected VAR to generate GM gains, we didn't expect to see

them until the end of F11 and into F12. Although GM of 46% in FQ1is not reported to be sustainable, the expected trend is verypromising and should drive earnings power in the out years andcontinue 'Street' estimates. Significant GM expansion was achievedin FQ1 despite 60% of installs occurring in international markets. Anelevated level of Japan installations with their respective highermargins, increased level (although still minimal at ~5%) oftrueBEAM contribution, continued warranty and service efficiencies,strong software installs, and a continued detector plate mix shift allcontributed to the GM upside. We believe the GM expansion storywill accelerate in F12 as trueBEAM accounts for 30%+ ofinstallations driving both oncology systems and service GMnorthward. We believe our new margin assumptions in both F11(45.3%) and F12 (45.9%) could prove to be conservative and a$4.00 EPS number for F12 is more achievable.

Japan Hiccup drives International Oncology order decline.Against the most difficult comparable quarter (supported by aJapanese stimulus which ended last March), Varian's Japanbusiness squandered the strong growth garnered in nearly everyother international territory. Varian faces one more quarter of adifficult Japanese comp before returning to a steady state.Ex-Japan international orders reportedly grew 17% Y/Y which webelieve is a testament to the momentum Varian has generatedglobally. We fully expect Varian to achieve double digit order growthex-Japan and high single digit order growth including Japan.

Japan Stings but Rad Onc runway and GM expansion storystill attractive. Although the Japan comp interrupts VARs

consecutive double digit oncology order growth streak, we believeVAR is best positioned (i.e. trueBEAM) to capture the Rad Oncgrowth opportunity over the next few years. GM expansion will driveupside to out year EPS estimates allowing us to maintain our bullishview.

Valuation/RisksOur new $84 price target is a blended avg. of: 1) a C12 20.5x P/E, 2)an 8x C12 EV/EBIDTA multiple, and 3) a 10 yr. DCF. Risks: adeteriorating macro-economic environment, constrained U.S. hospitalbudgets.

January 27, 2011

HealthcareMedical Devices & Diagnostics

United States of America

Company Update

Price Target Change

Estimate Change

Varian Medical Sys. (NYSE: VAR)GM Expansion Story Outshines Difficult Japan Comp

Investment SummaryRisk/reward continues to be compelling as VAR is well positioned tocapitalize on an improving U.S. hospital purchasing environment.Innovative technology (RapidArc/trueBEAM) should secure market

share gains in new orders driving top/bottom line growth and supportupside to current F11 and F12 consensus estimates.

Rating: BUY

Price: $71.96

Price Target: $84.00

Previous: $71.00

Bloomberg: NYSE: VAR

Market Data

52-Week Range: $72.19-$35.50

Total Entprs. Value (MM): $8,034.2Market Cap. (MM): $8,721.6

Insider Ownership: 0.4%Institutional Ownership: 92.3%Shares Out. (MM): 121.2

Float (MM): 121.0

Avg. Daily Vol.: 1,107,940

Financial Summary

Book Value (MM): $2470.9

Book Value/Share: $20.40

Net Debt (MM): ($687.4)Long-Term Debt (MM): $16.1

USD 2008A 2009A 2010A 2011E

Rev. (MM) 2086.2 2214.2 2356.6 2600.0

Prev. -- -- -- 2620.0

EV/Rev. 3.9x 3.6x 3.4x 3.1x

EPS

Dec 0.43 0.56 0.63 0.80A

Prev. -- -- -- 0.74

Mar 0.56 0.64 0.73 0.83

Jun 0.54 0.68 0.74 0.85

Prev. -- -- -- 0.83

Sep 0.75 0.78 0.87 0.97

Prev. -- -- -- 0.99

FY Sep 2.28 2.65 2.95 3.45

Prev. FY -- -- -- 3.40

FY P/E 31.6x 27.2x 24.4x 20.9xPro Forma EPS

ConsensusDiluted 3.38

Joshua Jennings, M.D.

(212) 284-2016, [email protected]

Anthony Petrone, CFA


Matthew Weiss, CFA



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Joshua Jennings, M.D. , [email protected], (212) 284-2016 Page 2 of 8

Slight revenue miss and weak Japan order volume off a difficult comp offset by solid EPS beat on GMstrength. VAR reported FQ1:11 revenues of $579.9M (+7% yr/yr; +8% cc), which was slightly below our $586.3Mprojection and consensus of $585M. Reported EPS of $0.80 was well ahead of both our $0.74 projection andconsensus of $0.73. VAR reported net oncology orders of $459M, with relative strength in both N.A. and Europe,though fell short of consensus of ~$484M, as management cited a steep drop in Japan orders on a very challengingyr/yr comp that benefited from a radiotherapy stimulus, which ceases in March 2010. We remain encouraged by solidtrueBEAM order flow in N.A. (+20%) and Europe and China (up double-digits), particularly in light of concernsregarding a potential adverse impact in the European region stemming from austerity measures and recent cautiouscommentary from bellwethers GE and Philips. Continued trueBEAM strength signals early adoption trends significantly

exceeding our expectations and supports new oncology order growth going forward, which is particularly essential forthe U.S. business.

Reiterates revenue guidance; Raises EPS outlook. Management reiterated their previously issued F11 outlookcalling for revenues to grow ~10%-11% yr/yr (translating to roughly $2,590M-$2,620M). The company raised EPSguidance to $3.39-$3.45, from a prior range of $3.34-$3.39, which largely reflects this past quarter's upside. CurrentF11 consensus estimates call for revenues to grow ~10% yr/yr to $2,587.7M and EPS to grow ~14% yr/yr to $3.38.While order weakness could result in concerns over revenue growth, we are confident in VAR's ability to generatetop-line growth for the year within its stated range. At the same time, we believe that F11 EPS guidance reflects ahealth degree of conservatism as it appears to us that the company's GM story is manifesting itself quicker thanexpectations even without a significant trueBEAM P&L impact (~30% of orders, though only ~5% of revenues).

Additional quarterly highlights. Total net orders came in at $592.8M in the quarter, which was up 20% yr/yr. VAR's

backlog at the end of the quarter was up 10% yr/yr to $2.2B. WW oncology revenues orders were $459M (+5%reported; +6% cc), coming in below consensus expectations of roughly $484M due to aforementioned weakness inJapan which experienced an approximate $40M decline in revenue on a yr/yr basis. During FQ1:11, VAR went upagainst a very tough comp with ~$65M of Japan-related revenue recognized in FQ1:10 vs. ~$22M recognized nFQ1:11. As the radiotherapy stimulus ended in March 2010, we expect another fairly challenging comp for FQ2:11, butnot nearly to the magnitude we saw this past quarter. International oncology order growth was down ~6% yr/yr afterbeing +7% last quarter. In addition to weakness in Japan, European order growth was impacted by a stronger dollar(cc growth in Europe was 17%). International oncology orders ex-Japan were up ~17% yr/yr. North American ordergrowth remains impressive coming at ~20% in FQ1:11. This was the fourth consecutive quarter of double-digit neworder oncology growth, with three successive quarters of such growth in North America. Oncology revenues benefitedfrom continued strength in trueBEAM and we believe that the vast majority of related orders represented new ordersvs. upgrades from backlog a trend that is expected to continue. X-ray revenues came in at $111.6M (+22% yr/yr) andrelated orders came in at $111.9M (+13% yr/yr) with management citing higher demand for both X-ray tubes and flatpanel detectors.

Gross margins of 46% in the quarter came in well ahead of our 43.7% estimate and were up 140 bps yr/yr driven bystrength in both Oncology (47.3%) due to higher trueBEAM revenues and X-ray (42.3%) owed to strength in tubes.Notably, oncology GMs rebounded from last quarter's disappointing print. Management announced on the call that ithad secured an additional three-year contract with Toshiba Medical Systems valued at ~$450M, reflecting roughly a40% increase in value over the company's prior three-year contract with Toshiba. During the quarter, VAR generated$138M in cash from operations, with management citing better receivables collections. The company's effective taxrate during the quarter came in at 29.6% which was ~100 bps lower than management's forecast due to thereinstatement of the R&D tax credit. For F11, management forecasts an effective tax rate of 31%-32%.

trueBEAM ramp continues. Although total trueBEAM orders of ~45 were down q/q from 60, we attribute this to typicalseasonality, and see no change in underlying demand for the product. During the quarter, trueBEAM accounted for30% of global unit orders (including the majority of N.A. orders), though continues to represent only ~5% of revenues.

Management indicated that there are ~40 installations that have either been completed or are in progress. We believethat VAR's trueBEAM platform represents a paradigm shift in radiation oncology treatment that should continue toboost new order levels going forward. Since the April launch of VAR's trueBEAM system, orders have ramped wellahead of our expectations, and management noted that they are very pleased with adoption trends thus far. VAR'strueBEAM platform (170 reported orders to date) and upgrade capabilities should continue to boost new order levelsgoing forward.

More color around F11 outlook. Management reiterated their previously issued F11 outlook calling for revenues togrow ~10%-11% yr/yr (translating to roughly $2,590M-$2,620M). The company raised EPS guidance to $3.39-$3.45,from a prior range of $3.34-$3.39, which largely reflects this past quarter's upside. Current F11 consensus estimatescall for revenues to grow ~10% yr/yr to $2,587.7M and EPS to grow ~14% yr/yr to $3.38. Aided by relatively easy

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comps in the U.S. put in place by the significant capital equipment crunch, we expect VAR to experience continuedmomentum in both the U.S. and international markets and believe that the company is on track to return to lowdouble-digit oncology order growth in F1H:11, which we believe could sustain top-line growth on the order of the samemagnitude into F12.

In F11, the company now forecasts GMs to rise ~100 bps, up from a prior forecast of 50 bps (driven by higher ASPtrueBEAM systems), with SG&A and R&D each expected to be up slightly as a percentage of sales, contributing tooverall operating leverage of ~50 bps for F11. We believe that F11 EPS guidance reflects a health degree ofconservatism (consistent with the company's managing of Street expectations) as it appears to us that the company's

GM story is manifesting itself quicker than expectations even without a significant trueBEAM P&L impact. We expecttrueBEAM to drive GM expansion going forward offsetting any margin compression from international systemsinstallation mix shift while continued mix shift to flat panel detectors will drive margins for the X-ray business.Management issued FQ2:11 guidance for revenue growth of ~9%-10%, which is roughly in line with the Street at ~9%,and EPS of $0.83-$0.86, which compares to the Street at $0.84.

Numerous positive catalysts provide solid runway for VAR through 2011 and beyond. We believe that Varian'ssales funnel is as strong as it has ever been due to its new product platform and the promise of technologicaladvancements that will provide increased clinical efficacy in the future. We see numerous catalysts in 2011 for VARincluding 1) Continued accelerated adoption of trueBEAM and trueBEAM STx platforms bolstering new oncology ordergrowth, top and bottom line outperformance; 2) Proton system orders expected in 2011; 3) quarterly earningsperformances; 4) ASTRO 2011 in Miami; 5) Further development of SRS capabilities (i.e. integration of RapidArc intoSRS treatment algorithms). We believe that the free standing center market, which just began to meaningfully rebound

in FQ4 from the proposed reimbursement schedule last summer, could provide an additional layer of growth for U.S.orders into F11. Our checks at ASTRO indicate that the trueBEAM funnel in N.A. looks positive and we are encouragedby the recent pick-up in activity in the U.S. and the relatively easy N.A. comps for 1H:11. Further, although internationalorders face more difficult comps, and more recent concerns regarding the impact of austerity measures in Europe(issues raised in recent quarterly Q4 reports from GE and Philips), international oncology orders ex-Japan were up~17% yr/yr. Moreover, we believe that VAR's push into new geographies could offset any near-term headwinds fromEurope, as we expect the UNIQUE system to provide VAR access to emerging markets in need of discountedpurchase prices including China.

Adjusting F11 and F12 estimates. Based on the company's F1Q:11 financial results, management's F11 outlook andour growth expectations for the radiation oncology market, we are adjusting our forward revenue and EPS estimates.We are adjusting our F11 revenue and EPS estimates to $2,600M and $3.45, from $2,620M and $3.40. Our revisedestimates correspond to revenue and EPS growth of 10% and 16%, respectively. Our new F11 estimates continue toreside above the current consensus of $2,588M (+10% yr/yr) and $3.38 (+14% yr/yr). During F1Q:11, VAR did not

repurchase any stock outside of the accelerated share repurchase executed in August and anticipated to be completedby late-February. We believe that the accelerated stock repurchase can support at least $0.05 of accretion in F11,which is reflected in our estimates. We note that the company has ~4.5M shares authorized for additional repurchasethrough F11. In addition, we are adjusting our F12 revenue and EPS estimates to $2,870M and $3.95, from $2,857Mand $3.90, which reflects yr/yr growth of 10% and 14%, respectively, and are above current consensus estimates of$2,808M (+8.5% yr/yr) and $3.81 (+13% yr/yr).

Raising PT. Our new $84 price target (previously $71) is a blended avg. of: 1) a C12 20.5x P/E, 2) a C12 8xEV/EBIDTA, and 3) a 10 yr. DCF. Although VAR's valuation may appear rich (~23x C11 EPS), we see VAR as one ofthe cleaner MedTech stories in C11 with numerous catalysts, GM expansion and continued upside to Street EPSestimates. We believe that consistent reliable top- and bottom-line growth stories deserve premium multiples.

Company DescriptionVarian Medical Systems, headquartered in Palo Alto, California, is the leading provider of integrated systems fortreating cancer with radiation therapy and is one of the premier suppliers of X-ray tubes for diagnostic imagingapplications. The company sells through a direct sales force of 50 reps in the U.S. and through a combination of directsales and independent distributors internationally. In April 1999, the company (then known as Varian Associates, Inc.)spun off its instruments business and its semiconductor equipment business to stockholders as separate companies.The original company retained the medical systems business and changed its name to Varian Medical Systems, Inc.

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Please see important disclosure information on pages 6 - 8 of this report.Joshua Jennings, M.D. , [email protected], (212) 284-2016

Varian: Estimated Annual Profit & Loss Statement ($MM)

2005 2006 2007 2008 2009 2010 2

Revenue $1,382.5 $1,597.8 $1,776.6 $2,086.2 $2,214.2 $2,356.6 $2,6

Cost of Goods Sold 789.6 934.5 1,042.1 1,216.6 1,253.6 1,331.0 1,42Gross Profit 592.9 663.3 734.5 869.6 960.5 1,025.6 1,1

R&D 82.1 100.4 117.4 136.3 147.4 156.7 1SG&A 205.9 253.5 281.9 326.5 339.0 334.7 39

Operating Income 304.9 309.4 335.2 406.8 474.1 534.2 60Interest (Income) (8.0) (14.0) (12.2) (11.5) (4.6) 1.0 Interest Expense 4.7 4.6 4.8 4.9 4.1 0.3

Pretax Income 312.9 323.4 347.4 418.3 478.7 532.9 6

Taxes 101.6 75.1 103.0 130.7 143.1 165.4 18GAAP Net Income 206.6 245.2 239.6 282.7 318.9 365.0 4

Stock Based Comp Expense (Tax effected) 23.3 26.6 29.7 27.4 29.0 28.9

Pro Forma Net Income 183.3 224.5 239.6 291.3 331.5 367.5 4

Diluted Shares (MM) 137.8 135.5 130.7 127.6 125.0 123.8 12Pro Forma EPS $1.33 $1.66 $1.83 $2.28 $2.65 $2.97 $

After-Tax "One" Time Charges $0.0 ($20.7) $0.0 $8.6 $12.6 $2.5 GAAP EPS $1.50 $1.81 $1.83 $2.22 $2.54 $2.95 $

Fully Taxed Cash Net Income 206.6 251.0 269.3 3 18.7 3 60.5 3 96.4 4

Cash EPS ex-SBC, one timers $1.50 $1.85 $2.06 $2.50 $2.88 $3.20 $

Margin Analysis

Gross Profit 42.9% 41.5% 41.3% 41.7% 43.4% 43.5% 45R&D 5.9% 6.3% 6.6% 6.5% 6.7% 6.6% 6SG&A 14.9% 15.9% 15.9% 15.6% 15.3% 14.2% 15

Operating Income 22.1% 19.4% 18.9% 19.5% 21.4% 22.7% 23Pretax Income 22.6% 20.2% 19.6% 20.1% 21.6% 22.6% 23Net Income 13.3% 14.0% 13.5% 14.0% 15.0% 15.6% 16Tax Rate 32.5% 23.2% 29.7% 31.2% 29.9% 31.0% 30

Growth Analysis

Total Revenue 16% 11% 17% 6% 6% Gross Profit 12% 11% 18% 10% 7%

R&D 22% 17% 16% 8% 6% SG&A 23% 11% 16% 4% -1%

Operating Income 3% 7% 20% 14% 11% Pretax Income 22% 7% 22% 14% 11% Net Income 22% 7% 22% 14% 11% Pro Forma EPS 25% 11% 25% 16% 12%

Sources: Company reports and Jefferies & Company, Inc. estimates


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ANALYST CERTIFICATIONS

I, Joshua Jennings, M.D., certify that all of the views expressed in this research report accurately reflect my personalviews about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is,or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

I, Anthony Petrone, CFA, certify that all of the views expressed in this research report accurately reflect my personalviews about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is,or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

I, Matthew Weiss, CFA, certify that all of the views expressed in this research report accurately reflect my personal

views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is,or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Important Disclosures

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instrumentsdiscussed in this report receive compensation based in part on the overall performance of the firm, includinginvestment banking income. We seek to update our research as appropriate, but various regulations may prevent usfrom doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports arepublished at irregular intervals as appropriate in the analyst's judgement.

Meanings of Jefferies & Company, Inc, RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a

12-month period.

Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus10% within a 12-month period.

Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10%or more within a 12-month period.

Our focus on mid-capitalization and growth companies implies that many of the companies we cover are typically morevolatile than the overall stock market, which can be amplified for companies with an average stock price consistentlybelow $10. For companies in this category only, the expected total return (price appreciation plus yield) for Buy ratedstocks is 20% or more within a 12-month period. For Hold rated stocks with an average stock price consistently below$10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated stocks with an average stock price consistently below $10, the expected total return (priceappreciation plus yield) is minus 20% within a 12-month period.

NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliancewith applicable regulations and/or Jefferies & Company, Inc. policies.

CS - Coverage Suspended. Jefferies & Company, Inc. has suspended coverage of this company.

NC - Not covered. Jefferies & Company, Inc. does not cover this company.

Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policyor applicable securities regulations prohibit certain types of communications, including investment recommendations.

Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which nofinancial projections or opinions on the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value,volatility and expected total return over the next 12 months. The price targets are based on several methodologies,which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow(DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium(discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value,

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dividend returns, and return on equity (ROE) over the next 12 months.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific toindividual investors. As such, the financial instruments discussed in this report may not be suitable for all investors andinvestors must make their own investment decisions based upon their specific investment objectives and financialsituation utilizing their own financial advisors as they deem necessary. Past performance of the financial instrumentsrecommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by

changes in economic, financial and political factors. If a financial instrument is denominated in a currency other thanthe investor's home currency, a change in exchange rates may adversely affect the price of, value of, or incomederived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whosevalues are affected by the currency of the underlying security, effectively assume currency risk.

Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q115

30

45

60

75

2008 2009 2010 2011

03/10/08UN:$40

01/05/10I:B:$55

01/28/10B:$57

04/09/10B:$64

10/26/10B:$71

Rating and Price Target History for: Varian Medical Systems, Inc. (VAR) as of 01-25-2011

Created by BlueMatrix

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [BUY] 587 51.90 43 7.33

HOLD [HOLD] 496 43.90 26 5.24

SELL [UNPF] 47 4.20 5 10.64

OTHER DISCLOSURES

This material has been prepared by Jefferies & Company, Inc. a U.S.-registered broker-dealer, employing appropriateexpertise, and in the belief that it is fair and not misleading. The information upon which this material is based was

obtained from sources believed to be reliable, but has not been independently verified, therefore, we do not guaranteeits accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of anoffer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date,and are subject to change without notice. Jefferies & Company, Inc. and Jefferies International Limited and theiraffiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent orprincipal for their own account. Upon request Jefferies & Company, Inc. may provide specialized research products orservices to certain customers focusing on the prospects for individual covered stocks as compared to other coveredstocks over varying time horizons or under differing market conditions. While the views expressed in these situationsmay not always be directionally consistent with the long-term views expressed in the analyst's published research, theanalyst has a reasonable basis and any inconsistencies can be reasonably explained.

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Upon request Jefferies International Limited may provide specialized research products or services to certain

customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varyingtime horizons or under differing market conditions. While the views expressed in these situations may not always bedirectionally consistent with the long-term views expressed in the analyst's published research, the analyst has areasonable basis and any inconsistencies can be reasonably explained.

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